Tuesday, May 15, 2012

SEC Takes a Closer Look at Real Estate Investment Trusts

A Real Estate Investment Trust (“REIT”) is generally a company that owns income producing real estate.  To qualify as a REIT, a company must have the majority of its assets and income connected to real estate investments and must annually distribute at least 90 percent of its taxable income to shareholders in the form of dividends.  To review additional qualifications of a REIT, See SEC - REIT Information

REITs have really come under intensifying scrutiny by securities regulators since many non-traded REITs have been forced to cut their estimated value and have ceased making distributions.  Furthermore, many of these REITs have attracted retirees as investors by promising steady and dependable distributions.  For example, the SEC has recently taken interest in the activities of Inland American Real Estate Trust to determine if it committed violations relating to management fees, the timing and amount of distributions paid to investors, determination of property impairments and transactions with affiliates.  The investigation was announced by Inland last week in its quarterly report.  Executives from Inland have stated that they intend to fully cooperate with any investigation and that they do not believe it has committed any violations. 

Inland holds around $11.2 billion in property, including retail hotels, offices, industrial buildings and apartment complexes.  It is the largest REIT in an industry of around 90 non-traded REITs.

FINRA has recently proposed new guidelines on adviser disclosure of REITs.  See FINRA Regulatory Notice.   Furthermore, the SEC has been pressing non-traded REITs to provide better disclosure on their share valuations because these valuations can vary due to some REITs relying on outside appraisals and others relying on their own management.  For instance, FINRA sued David Lerner Associates Inc., last year, alleging that the Apple REIT seller “unreasonably valued their shares at a constant price of $11, notwithstanding market fluctuations, performance declines and increased leverage.”  The case is still pending. 

In June, 2011, another REIT, Retail Properties of America Inc., estimated its value at $6.95 per share.  However, in its initial public offering last month, the shares were listed at $3.20 per share. 

REITs, however, may be appropriate for the savvy and experienced investor, particularly since many REITs have been investing in the global market.  Several U.S. REITs that have invested abroad believe the future is promising.  For instance, New York and Toronto based Brookfield Office Properties entered into its first London deal on a development site known as 100 Bishopgate.  Many of these investments are good for the patient investor because income is usually not realized until further down the road. 

If you have suffered losses as a result of purchasing non-traded REITs, contact us to discuss your legal rights.

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